USA compliant QROPS are complicated because they don’t just plug in to the offshore pension system like thousands of others around the world – but difficult does not mean impossible. QROPS USA is now a reality and new schemes are now live
Many US 401k pensions have registered with HM Revenue & Customs, HMRC, as QROPS – but the problems with transfers have lied in the States rather than elsewhere.
The US Internal Revenue Service, IRS, deemed UK pension transfers to a 401k pension incompatible, given the different structure of tax and benefits – resulting in a tax charge on the transferred fund. This put a hold on QROPS for US residents and citizens.
The chances of this changing are slim, especially with the advent of the Foreign Account Compliance Tax Act (FACTA) that adds extra reporting burdens to foreign financial institutions.
The IRS refused to accept any offshore trust managing a QROPS could meet strict reporting standards.
To understand the basics of QROPS in general, read the page here: www.iexpats.com/qrops/
Solving USA tax problems
This incompatibility can present a tax problem for US citizens or expat US residents who may have lived and worked in the UK building up pension pots.
As these the schemes are not recognised by the US, any contributions or investment growth could be subject to US Federal Income Tax..
This leaves questions for US citizens or expat US tax residents:
- Are they liable for US or UK income tax from taking payments from a UK registered pension?
- If so, how much of the liability is cancelled out by foreign tax credits, if any?
- If the member is not resident in the US, is any income or gains subject to US Federal Income Tax?
QROPS that comply with IRS pension rules
Answering these questions meant going back to the drawing board and building a QROPS from the ground up to meet both IRS and HMRC reporting requirements.
This new breed of QROPS match all IRS rules for qualifying pension schemes and comply with double taxation agreements.
Chris Wright of Qrops Investor explains, “There are locations with Double Taxation Agreement (DTA) with the US that make them a great place to have a QROPS. Malta appears to be the leading jurisdiction for USA residents and citizens looking at a QROPS”
For British expats in the US and US workers with UK pension rights, these QROPS can be tailored to include:
- Offsetting foreign tax credits against the taxable income arising on the transfer to the plan
- Protecting investment growth occurring within the QROPS from US Federal Income Tax
- The opportunity to draw an initial lump sum of a value up to 30% of the fund
- The possibility of drawing additional lump sums, as a result of the Double Tax Treaty, which may not be liable for US Federal Income Tax
- Provision of lump sum death benefits to beneficiaries
- Pension income not taxed in the UK
- Assets structured in US dollars with income paid in US dollars – straight in to a US bank account if required
- Switch between currencies to avoid the problems of exchange rate fluctuation. In the USA, income as dollars, while in Europe take income in Euros, and if in the UK take income as Pounds Sterling.
- Tax-free fund growth
- No need to buy an annuity
- A wider range of investments, from cash, unit trusts, shares, commodities, exchange traded funds (ETFs), commercial property and more.
Besides the currency and tax advantages of a US QROPS, another big benefit that should not be overlooked is estate planning opportunities.
Benefits of switching to a USA QROPS
Unlike a UK pension, no tax charge is levied on unused funds remaining in the QROPS. In the UK, the charge is 55%.
The no tax rule applies to QROPS funds paying regular benefits or funds that are not in drawdown.
The options are leaving some or all of the pension fund to family and loved ones on death.
QROPS funds are also beyond the reach of UK inheritance tax laws, but the pension rules of the offshore centre where the QROPS is based, plus those where the retirement saver lives, will apply.
The main benefits of switching UK pensions in to a QROPS are taking control of retirement savings and removing them from the UK tax net.
Who can start a USA Compliant QROPS?
- A UK national moving to the US
- A US national who has worked in the UK and is moving back to the US
- A US national living outside the US
- A US national who has worked in the UK and is now resident outside the US and the UK
- A Green Card holder who is resident outside the US and the UK
For British expats living Stateside, QROPS eligibility helps prove tax residence, as the pensions are not available to UK residents.
This article reviews some technical information and basic understanding of QROPS for USA residents and citizens. However if you are looking to transfer your UK pension to a QROPS you must seek qualified financial advice. A financial adviser will determine whether a QROPS is the right place for your pension and guide you through the process.
If you would like to be put in touch with a qualified financial adviser, please contact us via the contact form here for a referral.